President Obama proposed the new “Buffett Rule” in his state of the Union Address, which was a minimum tax of 30% for everyone making over a million dollars.
This is a ridiculous idea, but I have not heard conservative politicians attacking this proposal head on the way it should be. The first problem is if we are going to change the tax code we should look to making it simpler not more complex. If Obama feels taxes are too low, as he clearly does, he should have the courage to discuss the reasons some people who make more money pay a lower effective rate than others with the same family situation. There are three obvious ones, capital gains tax rates, deductions, and exclusions for municipal bonds. I plan to examine these here.
Before we start, let’s look a little at the reason given for this new rule “fairness.” The implication was that Buffett or Romney pays a much lower rate than average people. This is clearly not true since 47% pay no taxes or even have a negative tax rate. This is the biggest “fairness issue” and it is bad to have so many that pay nothing, not that I think that should be changed now. According to 2009 tax data 87% of tax filers paid a lower percentage of their income in taxes than Romney. So without even looking any further the bottom 85% would have no fairness issue to complain about.
Next we need to look at the major reason for the lower rate for people like Buffett or Romney, which is the lower rate on capital gains of 15% for people with high incomes. It is important to note that Democrats have cut capital gains taxes. Bill Clinton cut them in 1997 and Barrack Obama proposed a capital gains tax cut for small businesses.
Thus, it is recognized by both parties that lower capital gains tax rates are good for the economy. Next, we should note that without any changes the capital gains tax rate goes to 20% next year under current law. Since Harry Reid and the do-nothing Democrat Senate are unlikely to accept any reasonable deal this year, we should not worry about “fixing” anything for just this year.
Again, looking at 2009 tax data, 95% of all tax filers would have a tax rate of less than 20%. Based on that data, only the richest 5% of income earners have a right to complain. However, this forgets that the capital gains tax is part of a double tax and only half of the story. The corporations Romney invested in paid corporate taxes before Romney collected his gain. Tax rates average around 25% for all corporations.
After considering the double taxation issue, there is no “tax fairness” issue at all for Romney or Buffett. Even the study that I saw that suggested increasing capital gains taxes suggested doing so in small increments to avoid a significant drop in revenues - not doubling them. In addition, many studies indicate that raising capital gains taxes will collect the same or lower amounts of money, after the negative effects on the economy are considered. I do not think it is smart to raise taxes to chase some misguided sense of “fairness” to only collect less in revenues. Obama clearly does think that way.
For the case of municipal bonds, it is not so much a break for rich taxpayers as it is a subsidy on borrowing for local governments. High income people chose to take a lower interest rate to save money on their taxes. Both get a benefit. With many local governments in debt and struggling, I do not think it is a good time to remove this subsidy on their borrowing. If we did this it should be phased in over time and done when there is a solid recovery.
As for deductions and credits, I think in general many should be eliminated for all. These are common ways for politicians to give gifts to donors or favorite constituencies. Most should be eliminated except a few like home mortgage interest, charitable contributions, and other taxes paid. For rich people the charitable contributions deduction is the one that results in the lowering of their taxes paid. If this concerns Obama he should propose capping the amount that can be deducted and lower the top tax rates.
Obama knows all this, so I have to assume he is just another dishonest politician. I heard all of his tax increases don’t come close to paying for his suggested spending increases. He has been claiming that the 30% rate is what people paid under Reagan which is inaccurate. After Reagan was finished the top rate was 28%, so nobody averaged 30% in income taxes paid.
Again, this is part of his class warfare reelection strategy. Use people’s emotions of envy and greed to get them to forget he has no solutions for any of our real issues, and to forget his miserable record. He also is not serious about working to change anything this year due to the second part of his strategy of running against Congress. Harry Reid and the do nothing Democrat Senate has gone over 1000 days without passing a budget. Reid will only bring items that have to be done or ones they have the votes to shoot down.
They will not vote on many items the house passes or will pass, that many Democrats would feel they should vote for. That is why Obama chooses the ridiculous number of 30% and moronic way of dealing with what he thinks is the issue. He does not really want to fix it, just complain about it. So let drop the divisive class warfare rhetoric, phony “fairness issue”, and get serious about the important issues.